UK: Implementation Of The BRRD Unfolds

Last Updated: 18 March 2015
Article by Josie Day and Michael Wainwright

UK regulators implemented the majority of the Bank Recovery and Resolution Directive from January 2015, using a combination of changes to primary legislation, new secondary legislation, along with regulatory rules and supervisory statements. Even though the British 'living wills' initiative had largely anticipated the BRRD, legislators and regulators needed to make several changes to ensure compliance with EU standards. Michael Wainwright and Josie Day outline how the UK's BRRD legislative toolkit has developed.

Overview: the BRRD's aims 

The title of the Bank Recovery and Resolution Directive (the BRRD – 2014/59/EU) states its aim is to establish "a framework for the recovery and resolution of credit institutions and investment firms" ('institutions'). As its recitals explain, in the financial crisis there was "a significant lack of adequate tools at Union level to deal effectively with unsound or failing credit institutions and investment firms." So the directive sets out to remedy this in a number of ways. In summary it calls for tools, measures and powers:

  • to ensure relevant institutions make plans to facilitate their recovery if they are in financial difficulty and so seek to prevent their insolvency;
  • for early intervention by national competent authorities if problems arise at relevant institutions;
  • "to minimise negative repercussions by preserving the systemically important functions of the institution concerned" and to resolve relevant institutions that become insolvent, in a way that minimises costs to the public and the impact on the financial system.

Why was the BRRD necessary?

Previously there were no harmonised procedures to resolve such institutions at Union level. The financial crisis showed that general corporate insolvency procedures were largely inadequate to resolve complex financial institutions. This meant a new toolkit was needed, for quick and early intervention in unsound or failing institutions, while aiming always to preserve the institution's critical functions and minimise the impact of its failure on the economy and financial system.

In such a resolution, first the shareholders and then the institution's creditors bear the losses. Importantly, no creditor is to end up worse off than it would have been had the institution been wound up under normal insolvency proceedings. Government bail outs (including temporary public ownership) are not banned: but are a last resort. Harmonised procedures would also make it possible to achieve consistency in the recovery and resolution planning across groups in the Union.

What does the BRRD do?

In principle, the BRRD provides a comprehensive recovery and resolution regime for banks and key investment firms. It sets minimum levels of requirement that each EU member state must adhere to and provides for regulatory co-operation.

The Financial Conduct Authority usefully summarises the BRRD as involving three main steps.
Preparation: Firms and regulators must put in place plans to prepare for situations that could lead to financial stress or failure. The plans should address how these situations would be dealt with if they were to arise.

  • A recovery plan: firms must prepare and submit a recovery plan to their competent authority for the authority's review.
  • A resolution plan: firms must provide specified information to their resolution authority, on the basis of which the latter will draw up a resolution plan for the firm.

Firms may need to make changes to their structure or businesses to address any hurdles to resolvability the authorities identify during the planning process.

Early intervention: Much work has focused on early intervention if a firm breaches an identified 'trigger' requirement – as a result of which it will be deemed to face financial distress. When a firm breaches a trigger, the authorities have a range of possible actions. These include replacing the firm's management, requiring the firm to draw up an action plan to mitigate the problems, implementing part, or all, of the firm's recovery plan, and moving the firm into resolution.

Resolution: The resolution authority will step in if a firm is failing or likely to fail with no reasonable prospect of alternative private sector recovery measures. The resolution authority has a toolkit including selling or merging the business with another firm, setting up a temporary bridge bank, transferring the assets to a separate vehicle, as well as writing down and converting the liabilities (bail-in).

What was the situation in the UK pre-BRRD? 

Since there was no harmonised resolution and recovery regime at Union level prior to the BRRD, the UK introduced its own special resolution regime (SRR) under the Banking Act 2009. The SRR gave power and responsibility to the Bank of England, HM Treasury and the Prudential Regulation Authority (and before it, the Financial Services Authority) for stabilising or winding down systemically important institutions. The institutions included banks, building societies and certain investment firms. The PRA had in place rules effective from the beginning of 2014 requiring firms to have recovery plans and resolution packs and had actively engaged with firms about their plans. It decided to bring its rules into force despite knowing the BRRD was approaching, but hoped implementation of the finalised BRRD would not lead to further significant change.

So, in the UK, the process has been not so much about implementation of entirely new rules as amending or in some cases replacing existing requirements that were already in place. At the level of primary and secondary legislation in the UK, as well as regulators' rules, there have been extensive changes. We summarise some of the key changes below. 

Amendments to primary and secondary legislation

The Banking Act 2009 – existing SRR arrangements were amended significantly to incorporate the requirements of the BRRD. To do so, Treasury published a number of statutory instruments relating to bail-in powers and changed the law to implement the BRRD:

  • The Bank Recovery and Resolution Order 2014 took effect on 1 January 2015 and is the main piece of legislation implementing the BRRD into UK law. Much of the Order amends the Banking Act to align it with the BRRD and created the necessary new regulatory powers, but there were also some changes to the Financial Services and Markets Act 2000 broadly to give the FCA, PRA and Bank of England the powers they would need to discharge their functions as competent authorities (FCA and PRA) as well as resolution authority (Bank of England) under the BRRD;
  • the Bank Recovery and Resolution (No 2) Order 2014 partly implemented the BRRD and took effect mainly on 10 January 2015, with part being deferred until 1 January 2016. It sets out procedural and other requirements with respect to planning and taking measures for the purpose of restoring the financial position of credit institutions, investment firms and certain related companies, along with achieving one or more resolution objectives;
  • the Banks and Building Societies (Depositor Preference and Priorities) Order 2014 also partly implemented the BRRD and ensured that both deposits eligible for compensation under the Financial Services Compensation Scheme (eligible deposits) and other deposits that would be eligible deposits but for the fact they are made in branches of UK banks outside the EEA, are treated as preferential debts. The order additionally provides that eligible deposits get a higher priority within the class of preferential debts than other deposits. The order amends certain provisions in the Insolvency Act 1986 in respect of preferential debts. It also alters the priorities for the distribution of the assets of a building society on winding up;
  • the Banking Act 2009 (Mandatory Compensation Arrangements Following Bail-in) Regulations 2014 took effect on 1 January 2015 and set out provisions that must, or may, be included in a compensation order made under the Banking Act as amended by the Financial Services (Banking Reform) Act 2013 (Banking Reform Act) following the exercise of the power to make special bail-in provision in respect of banks, banking group companies, investment firms or building societies;
  • the Banking Act 2009 (Restriction of Special Bail-in Provision, etc) Order 2014 also took effect on 1 January 2015 and imposed restrictions on the making of special bail-in provisions to comply with the BRRD; and
  • the Building Societies (Bail-in) Order 2014 took effect on 10 January 2015 and modified the Banking Act's special resolution regime provisions following the application to building societies of the bail-in stabilisation option introduced by the Banking Reform Act.

New rules for regulators: PRA

Both the PRA and FCA had warned firms they would not be able to make final rules until the legislative amendments described above that allowed them to do so took effect. However, they had, during 2014, clearly signalled to firms what their final rules would be. Both regulators published their final rules in January 2015.

The PRA published a policy statement in January 2015 (PS1/15 (Implementing the Bank Recovery and Resolution Directive – response to CP13/14)) regarding its consultation on implementing the BRRD, containing the final rules together with supervisory statements on recovery planning and resolution planning as well as materials on intra-group financial support. The PRA said most of the responses it received focused on recovery planning requirements and contractual clauses recognising bail-in powers. Among the more controversial aspects of its proposals were:

  • wind-down analysis: Respondents commented that the BRRD does not require a wind-down analysis, but the PRA noted it is a minimum harmonisation directive that allows member states to take additional measures. It considers that a wind-down analysis is important for firms with large trading books; and
  • contractual recognition of bail-in powers: respondents favoured a phased implementation, and the PRA will allow this, over the next period until 1 January 2016.

Most of the PRA's new rules and supervisory statements took effect from 19 January 2015, except those requiring contractual clauses in eligible debt instruments, for which the effective date was 19 February 2015.

The rules form part of the new-look PRA Rulebook. The previously existing PRA requirements for recovery plans and resolution packs are now replaced by a new application and definitions section along with rules on recovery plans, resolution packs, review of recovery plans and resolution packs as well as governance arrangements. There are separate modules in the rulebook for CRR firms and the rulebook for non-CRR firms within the PRA handbook. 

New rules for regulators: FCA 

The FCA's new rules are also already in force, except for the agreed delay to the rules on contractual recognition of bail-in powers.

  • The FCA published feedback on its consultation regarding implementation of the BRRD (or, as it calls it, the RRD) and its final rules in January 2015 (PS15/2). The FCA needed to implement the BRRD in respect of IFPRU 730K investment firms that are not PRA-regulated (around 230 firms) and group entities in a group that contains an IFPRU 730K firm or a credit institution.
  • Following responses, the FCA said:
    • the BRRD is not clear on whether the definition of a 'financial institution' may include an IFPRU 125K or 50K firm. For the time being, it has therefore not included them in its rules but will explore whether this is the legislators' intention. It also excluded from its rules incoming EEA and any third-country firms;
    • it cannot conduct a case-by-case assessment of each affected firm to assess precisely which obligations should apply. Its research showed that 83% of IPRU 730K firms will be able to use simplified obligations, and it will continue with its proposal to use its assessment approach to determine which firms must use the 'general' obligations;
    • it agrees that some areas it suggested be covered in a recovery plan are not essential for firms using simplified obligations; and
    • like the PRA, it will delay application of its rules on the contractual recognition of bail-in until 1 January 2016.
  • The FCA also confirmed it will not make any rules to specify particular early intervention triggers, nor will it require firms to keep detailed records of financial contracts as part of recovery plans.
  • Finally, it says it will discuss respondents' views on the minimum requirement for own funds and eligible liabilities (MREL) with the Bank of England, which is the resolution authority, and so will determine the MREL. The FCA's rule changes amend the Glossary, IFPRU and the Supervision Manual. The rule on recovery and resolution plans in IF-PRU 2.5 is now deleted.

Is that the end of the story?

No. The important new contractual bail-in requirements are not yet in force. Many provisions in the directive remain to be amplified by regulatory technical standards and guidelines prepared by the European Banking Authority (EBA). Some are already in draft and under consultation, but their final details that firms and regulators will need to follow remain a work in progress. The PRA and FCA have made note to firms that regulatory expectations and perhaps rules will change as the EBA further develops its thinking. Hopefully, though, UK institutions were prepared for this and many already have good liaison with the authorities. However, they cannot be complacent, given constant regulatory change.

This article first appeared in the March 2015 edition of Compliance Monitor. Written by Michael Wainwright and Josie Day in Dentons' London office.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Events from this Firm
28 Sep 2017, Seminar, London, UK

On 26 July the FCA published its long-expected consultation paper on the extension of the SMCR to all FCA-authorised firms. The so-called "core regime" introduces the key concepts of regulator-approved senior managers, firm-approved certification staff and conduct rules applicable to virtually all staff.

3 Oct 2017, Conference, Zurich, Switzerland

As the founding Partner of the Europe-Iran Forum, Dentons Europe will once again support this year’s event. This compelling event which explores all Iran-related topics will take place in Zürich on 3rd and 4th October.

4 Oct 2017, Workshop, London, UK

We are hosting an interactive workshop where we will run a mock High Court trial of an employee competition case – where the members of the audience are the judges. The session, aimed at in-house counsel and HR professionals, will offer an insight as to how disputes involving employees moving to a competitor play out in practice.

 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.